Money Market Intermediaries

The Discount and Finance House of India:

The DFHI was set up in April 1988 by the Reserve Bank with the objective of deepening and activating the money market. It has commenced its operations from July 28, 1988.

It is a joint stock company in form and is jointly owned by the Reserve Bank, public sector banks and all-India financial institutions which have contributed to its paid-up capital of Rs200crore in the proportion of 5:3:2. In addition to refinance facility with the Reserve Bank and a credit of Rs100crore from 28 public sector banks on a consortium basis are the sources of its funds.

The role of the DFHI is to function as a specialized money market intermediary for stimulating activity in money market instruments and develop secondary market in these instruments. It also undertakes short-term buy-back operations in the government and approved dated securities. DFHI mobilizes funds/resources from commercial/cooperative banks, financial institutions, and corporate entities having resources to lend (which individually may not represent tradable volumes in wholesale market) which are pooled and lent in the money market. The two-way regular quotes in money market instruments provided by DFHI serve as a base to broaden the secondary market and give an assured liquidity to the instruments.

DFHI was categorized as an eligible institution under the relevant provisions of the RBI Act, 1934, in November 1989 so that the placement of funds with DFHI can be included as an asset with the banking system for netting purposes while calculating the net demand and time liabilities for reserve purposes. DFHI is also an authorized institution to undertake repo transactions in treasury bills and all dated government securities to impart greater liquidity to these instruments.

Since November 13, 1995, DFHI is an accredited primary dealer. With this accreditation, its role has undergone a transformation. Now it acts as a market maker, giving two-way quotes and takes large positions on its account in government securities.

The DFHI deals in treasury bills, commercial bills, certificates of deposits, commercial paper, short-term deposits, call/notice money market and government securities. The presence of the DFHI as an intermediary in the money market has helped the corporate entities, banks, and financial institutions to raise short-term money and invest short-term surpluses. The DFHI also extends repos, that is, buy-back facility up to 14 days, to banks and financial institutions in respect of money market instruments.

The cumulative turnover of the DFHI in all financial transactions increased four fold in a span of nine years. The major part of the turnover was in call money followed by government dated securities and treasury bills. Its business in CDs and CPs was negligible and business in commercial bills declined sharply in the 1990s. Its dealings in government securities exceeded those in treasury bills after being accredited as a primary dealer.

The DFHI has been concentrating on the call money market rather than activating other money market instruments like CPs, CDs and CBs. These instruments need to be developed further for activating and deepening the money market.

Money Market Mutual Funds:
Money Market Mutual Funds (MMMFs) were introduced in April 1991 to provide an additional short-term avenue for investment and bring money market investment within the reach of individuals. These mutual funds would invest exclusively in money market instruments.

MMMFs bridge the gap between small individual investors and the money market. MMMF mobilizes savings from small investors and invests them in short-term debt instruments or money market instruments.

A Task Force was constituted to examine the broad framework outlined in April 1991 and consider the implications of the scheme. Based on the recommendations of the Task Force, a detailed scheme of MMMFs was announced by the Reserve Bank in April 1992.

The MMMFs portfolio consists of short-term money market instruments. An investor investing in MMMFs gets a yield close to short-term money market rates coupled with adequate liquidity.